Home | News | Kenyan 3-Judge Court Bench now rules capping of interest rates unconstitutional after close to 3 years in operation

Kenyan 3-Judge Court Bench now rules capping of interest rates unconstitutional after close to 3 years in operation

  • A three Judge Court Bench has ruled that the capping of interest rates under Banking Act section 32B is unconstitutional.
  • In August 2016, President Uhuru Kenyatta signed the bill into law hoping it would make it easy for Consumers to access cheap loans, it didn't work.
  • In 2017, after a year occasioned by slow economic growth, the Central Bank of Kenya (CBK) showed the strongest signal that it intended to push for scrapping of the year-old law capping interest rates due to its negative effect on the economy.

A three Judge Court Bench has ruled that the capping of interest rates under Banking Act section 32B is unconstitutional.

However, implementation of the same has been suspended for 12 months to allow regulator to put in place appropriate mechanisms.

President Uhuru signing interest capping bill into law

In August 2016, President Uhuru Kenyatta signed the bill into law hoping it would make it easy for Consumers to access cheap loans, it didn't work.

The law sought to protect ordinary Kenyans from being overcharged by commercial banks which used to charge interests rates as high as 20% by putting a caps loan charge at four percentage points above the Central Bank Rate (CBR), presently standing at 10 per cent.

The interest rates law, has however, since been blamed for the contraction in the financial services sector, where the industry loan book growth slowed to 3.7% in the first half of 2017.

Central Bank of Kenya headquarters in Nairobi.

Close to three years later, the law continues to cause ripples in the local financial sector. Private sector credit growth for instance fell to 4.3 per cent in December 2016 compared to more than 17 per cent a year earlier, Central Bank of Kenya data show.

In the period, interest income declined 13% as the cost of funds reduced 14% as lenders shied away from the private sector, instead choosing to do business with the government leaving consumers high and dry and at the mercy of shylocks.

Also read: 99% of bank accounts in Kenya hold a balance of less than $10,000

President Uhuru Kenyatta talks to Safaricom CEO Bob Collymore (left), KCB Group CEO Joshua Oigara (centre), Equity Bank CEO James Mwangi

In a bid to remain profitable, several financial institutions opted to shed off hundreds of jobs as others decided to close down tens of branches.

Banks in East Africa’s biggest economy have closed at least 39 branches and cut 1,620 jobs since the caps were announced in August 2016, according to Cytonn Investment Management Ltd., a Nairobi-based money manager.

Kenyans queuing to bank at a local bank: Kenya Commercial Bank

In 2017, after a year occasioned by slow economic growth, the Central Bank of Kenya (CBK) showed the strongest signal that it intended to push for scrapping of the year-old law capping interest rates due to its negative effect on the economy.

“I think it is clear to us that this (rate cap) has been problematic in many ways. What I cannot tell you is the path going forward (and) how this will happen,” CBK governor Dr. Patrick Njoroge said at the time.

CBK Governor Dr Patrick Njoroge

It’s not Kenya alone however that has some restrictions on lending rates. The policy is quite popular around the world.

At least 76 countries around the world, representing more than 80% of global GDP and global financial assets, impose some restrictions on lending rates, according to the World Bank.

These countries are not clustered in specific regions or income groups, but spread across all geographic and income dimensions.

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